Key Audit Areas
Key audit areas in detail
(a) Ascertainment of creditors and debtors: Insurance companies do not keep their personal ledgers in such a way as to produce directly a separate list of debtors and creditors. Their ledgers instead reflect the section of the market from such the business originates as broker, reinsurer, direct policy holder etc, thus it is quite possible such both creditor and debtor balances will exist in one ledger occasionally for the same person. The legal position along with regard to right of set off between credit and debit balances along with the similar person is not clear. From a professional point of view the auditor have to ensure consequently such the company adopts a consistence reach in establishing the separate amounts of creditors and debtors.
(b)Unearned premiums: This represents the suitable portion of a premium received through the year under review however is applicable to later accounting periods. One time again, a consistent approach have to be adopted and the accounts should declare the basis chosen through the insurance company within the heading of accounting policies. The most general sources adopted for annual premiums are the 24th basis.
(c)Expired risks: This represents the carry forward of provisions for the next accounting time in circumstances whereas it appears such insurance business undertaken in the duration under review is unprofitable. This creates it similar to the provision on long term contracts in the construction industry. The audit difficulty is such a considerable factor of adjustment enters the computation of those risks, the matter is for the auditor to form an opinion in requirement for such a provision and whether the sum provided is adequate if one exists.
(d)Outstanding claims: We can classify these claims in three following categories:
i. Those that have been notified and agreed however are still outstanding in the balance sheet date
ii. Those that have been notified before, although not yet agreed at the balance sheet date and
iii. Those that have arisen although have not yet been notified to the company through the balance sheet date.
A good deal of estimation is required along with regard to category (ii) and (iii) above. Therefore the audit procedures would invariably involve, review of the claims files in order to appraise the company's approximations. Also we must compare the average cost of outstanding claims for each one of class of business along with current experience and at last the auditor should examine statistical fundamentals comparing past estimates along with actual conclusion.